Investor Corner/Building and judging a portfolio/Performance Measurement
3.2.2 XIRR
XIRR, or Extended Internal Rate of Return, is the correct way to measure return when money moves in and out at different times, exactly as happens with SIPs, top-ups and partial withdrawals.
Why a simple average falls short
If you invested different amounts on different dates through a SIP, a simple average of each instalment's individual return does not correctly reflect your actual overall return, because it fails to account for the fact that later instalments had less time to grow than earlier ones. XIRR solves this properly by considering the exact date and size of every single cash flow, in and out, and solving for the single annualised rate that makes them all consistent.
What XIRR is really answering
XIRR answers a very specific, very useful question: given exactly when and how much money went in, and exactly when and how much came out or is worth today, what constant annual rate of return would explain that entire pattern? It is the standard measure for anything involving irregular cash flows, which describes most real-world SIP investing rather well.
Where you will encounter it
Any mutual fund tracking tool worth using should be computing XIRR for you automatically, since calculating it by hand for a portfolio with dozens of SIP instalments across multiple funds is genuinely impractical without dedicated software. It is the single most important return figure for any SIP investor to actually understand and trust.
How PriLytics helps. PriLytics computes accurate XIRR for every fund and for your whole portfolio, based on the exact dates and amounts from your real transaction history. See how returns are calculated.